UK services activity slows unexpectedly

International / 6 January 2014, 1:20pm

Reuters

Construction workers erect scaffolding in the financial district of the City of London.

London - Growth in Britain's services sector slowed unexpectedly in December, but confidence rose and the economy still looks likely to have recorded its strongest expansion since 2007 last year, an industry survey showed on Monday.

The monthly services purchasing managers' index (PMI), compiled by data company Markit, fell to a six-month low of 58.8 in December, rather than holding at November's level of 60.0 as economists polled by Reuters had forecast.

Nonetheless, the figure remains well above the 50 mark that separates growth from contraction, and businesses' confidence about the future rose to the highest level since March 2010 at 73.5, helped by expanding order books.

“More strong growth looks likely as we move into 2014,” said Markit's chief economist, Chris Williamson. “It is perhaps inevitable, however, that we may see the rate of growth slow compared with the unusually strong pace seen in recent months.”

Both the manufacturing and construction PMIs fell last week, and Markit said a composite index of the three PMIs dropped to 59.5 in December from 60.4, its lowest level since July.

Britain's economy grew at an annualised rate of more than 3 percent in the second and third quarters of 2013 - well above its long-term average of just over 2 percent.

Williamson said the PMIs pointed to an even faster rate of growth in the final three months of 2013.

When fourth-quarter GDP data is published by the Office of National Statistics on January 28, Markit said it could well show that output for 2013 as a whole grew by 1.9 percent, the fastest growth since the start of the financial crisis in 2007.

That is more than forecast by the Bank of England, the International Monetary Fund or the government's budget watchdog, and marks a sharp turnaround from the start of last year, when Britain seemed at risk of slipping back into recession.

However, there are doubts about whether this pace of growth can be sustained in 2014.

Growth in 2013 was largely driven by households saving less and spending more - a trend which cannot continue indefinitely and which the BoE wants to see replaced by stronger exports and more business investment.

Signs so far have not been encouraging.

Britain recorded its biggest current account deficit since 1989 in the third quarter of 2013, and BoE figures on Friday showed the biggest fall in lending to businesses since 2011 in November.

However, things may be beginning to change.

A survey by accountancy firm Deloitte, published earlier on Monday, showed that 57 percent of finance directors thought it was a good time to take on more risk and invest, and that it would get easier to borrow from banks this year.

In November the BoE announced a revamp of its Funding for Lending Scheme, which offers cheap finance to banks, so that it focuses purely on business lending rather than mortgages.

Lenders are already approving more mortgages than any time since January 2008, and house prices are rising at their fastest rate in more than four years, raising fears that a property bubble could develop.

Markit said the firms it surveyed - which include banks, hotels and transport companies, but not retailers - planned to invest in more capacity, new products and marketing in 2014.

Hiring is also continuing at a rapid pace, meaning that unemployment is likely to move ever closer to the 7 percent threshold at which the Bank of England has said it will start to consider raising interest rates.

However, the central bank has stressed that a rate rise is far from certain when unemployment reaches this level - possibly as early as the end of this year - and the PMI survey showed firms were raising prices by slightly less than before.

Economists polled by Reuters last week did not expect rates to rise until the second half of 2015. - Reuters